While money may not buy you happiness, it may be able to “buy” you employees. If your compensation practices are falling short, you may be losing top talent to the competition, and a new study shows that there is a “radical shift” in how companies are planning their annual compensation packages.
With increased competition for talent, unemployment down, and more than 89% of executives expecting an increase in competition for talent in the coming year, according to Mercer’s 2018 Global Talent Trends Study, one might think it is a “golden age” for American workers.
However, based on the results of Mercer’s 2018/2019 US Compensation Planning Survey, salary increase budgets for 2018 are flat at 2.8% and projected to be only 2.9% for 2019. Even an influx of cash from the Trump Administration’s Tax Cuts and Jobs Act has not had an impact—only 4% of employers plan to redirect tax savings to salary increase budgets in 2019, of which 53% project the increase to be less than 1% of payroll.
“It’s well documented that talent is critical to business transformation and how talent is rewarded impacts an organization’s ability to retain and build the workforce needed to deliver on future business objectives,” said Mary Ann Sardone, Partner and Mercer’s North America Workforce Rewards Practice Leader. “Current compensation systems are struggling from years of small salary increase budgets, which has made differentiation difficult and has caused pay raises to be less a reflection of performance and more about maintaining at least a minimum level of competitiveness.”
While employees may have understood tight budgets in a weak economy, they are becoming increasingly unhappy with their pay as the economy continues to improve. Employee perception of fair pay has declined from 57% to 52% over the last 5 years, and perception of pay for performance has dropped from 55% to 47%, according to an analysis by Mercer Sirota of employee satisfaction data from approximately one million employees.
According to a Mercer Select Intelligence study of current economic projections and 20 years of historical data, U.S. salary increase budgets will likely remain flat through 2021. While many factors are contributing, three stand out:
- Cost containment: As organizations have placed more focus on maximizing shareholder value, they have focused on reducing costs—for many industries employee salaries represent one of the most significant operating costs.
- Economic uncertainty: Due to the current political climate, financial leaders continue to be conservative and limit increases in fixed costs. Since salary increases are not easily reversible, there is likely a hesitation to pull the trigger on these longer-term fixed costs.
- Globalization of labor forces: Wage stagnation is not just a U.S. market-driven issue, but a global phenomenon. Employers are increasingly able to tap into a global talent pools, which drives wages towards a global equilibrium over the long term.
Given these dynamics, how do employers stand out in a crowded marketplace? Here are some recommended actions for organizations rethinking their compensation plan and total rewards strategy:
Be Fair, Transparent, and Focus on Pay Equity
Pay equity should be top of mind given the increase in public scrutiny from activist investors and regulation in this space. As labor markets have tightened, employers have held on budgets for salary increases to current employees, but have “loosened their belts” when it comes to hiring rates out of necessity given the competition for talent.
Often, new hires are being brought in at a premium over their peers. Furthermore, research shows that employees that asked for a raise received one. As a result of these dynamics, employees are demanding greater pay transparency—as are many regulators—but to get there companies must create the foundation for fair and equitable pay delivery, which often starts with the annual salary increase.
Rethink Pay for Performance
If the annual salary increase process reflects the new reality of salary increase budgets, it may be a good time to rethink traditional notions of pay for performance. Historically, salary increases were advertised as “merit budgets” to highlight pay for performance. Market pressures have driven the need to balance pay for performance with maintaining market competitiveness.
The reality is that the common practice of slicing a budget of 3% by these two dimensions is falling short on both fronts: internal pay is falling behind the market in many pockets and performance differentiation is limited.
Consider other levers to redefine pay for performance. Organizations that focus on career progression not only as a means to professional advancement but also as a means to rewarding performance have an opportunity to make a greater impact with limited resources.
Consider Salary Increase Budgets as a Strategic Investment in the Business
In today’s environment, every company has a unique mix of workforce needs that requires building or repurposing talent for the future. This may call for an investment in base pay that is different than the competitors.
Like any investment, how salary increases are allocated should be based on a sound business case. With typical salary increase budgets being a multi-million-dollar long-term investment in human capital, both an annual and long-term strategic plan for salary increase budgets is essential.
Differentiate with Experiential and Emotional Rewards
Pay is not the only way for organizations to invest in their workforce and prepare for the future. Once compensation is set, consider expanding the view of rewards to include elements that can differentiate the employee experience in a way that other employers cannot easily replicate:
- Enhance visibility into career opportunities by developing a career framework that makes it easier for employees to seek opportunities within the company and targets development and training to build critical skills.
- Demonstrate a focus on total well-being for employees that goes beyond the physical health and includes their financial, emotional, and social well-being.
- Harness the power of the company’s purpose to create an emotional connection to the company and help employees discover more meaning in their work.
“Given the state of the labor market, the external scrutiny on pay equity and the continued trend of tight merit budgets, employee rewards is on the top of the agenda,” said Lauren Mason, Principal at Mercer. “Employers that do not embrace a new model may not be able to leverage one of their greatest assets – their people – to compete in the future of work.”